EuroGroup to discuss Spanish bailout

Eurozone finance ministers will discuss on Friday if Spain should ask for
financial support after the announcement of the European Central Bank's new
bond-buying programme brought Madrid's borrowing costs sharply lower.

German Chancellor Angela Merkel and Spain's Prime Minister Mariano Rajoy. Spain, in its reluctance to seek help, may find an ally in Germany, as long as bond yields remain stablePhoto: Reuters

6:37AM BST 14 Sep 2012

For the first time since the start of the year the ministers' talks will take place at a time when market pressure for immediate action to solve the eurozone sovereign debt crisis is easing, rather than mounting.

ECB's announcement last week that it could buy unlimited amounts of Spanish bonds, should it apply for help from the eurozone bailout fund, brought Spanish 10-year bond yields down from 7.64pc on July 24 to 5.62pc on Thursday.

Yields of Italy, under similar market pressure since the start of the year, fell from 6.6pc on July 24 to 5.03pc on Thursday, Reuters reported.

But many policymakers believe that for yields to fall lower, or even remain at these levels, the ECB would have to show its promises are not empty.

The bank can only do so if Spain makes a formal application for the eurozone to buy its bonds at primary auctions and accept the reforms that such aid would be conditional upon, freeing the ECB to intervene on the secondary bond market.

Spain does not want to ask for financial help because Prime Minister Mariano Rajoy fears the political backlash at home, but he may eventually have no other choice.

"There will be a discussion if they will ask for help or not. After the ECB announcements there is bigger pressure on the Spaniards to apply," one eurozone official said of the talks in Cyprus, itself a candidate for a bailout.

He added Spain would prefer to apply together with Italy, rather than alone, to dilute the negative impression of having mismanaged its public finances.

But another eurozone official said Spain, in its reluctance to seek help, may find an ally in Germany, as long as bond yields remain stable.

"Berlin could be willing to accept that Spain refrains from asking for euro zone/ECB help if markets remain calm," the second official said.

"Berlin finds it difficult to win parliamentary backing on funding for new aid programmes, so, paradoxically, they could even be on the same side of Spain when the issue will be discussed," the second official said.

Several eurozone officials speculated that a Spanish application could come in early October, in time for the next meeting of euro zone finance ministers on October 8.

This would be after the presentation of Spain's 2013 budget and the recapitalisation needs of its banking sector, both due on September 28.

So far markets have calmed after the German constitutional court cleared the way to set up the €500bn permanent eurozone bailout fund ESM, pro-European parties won elections in the Netherlands and the eurozone is moving towards a banking union with the ECB as the single supervisor.

But third eurozone official said Spain should have euro one support ready when international lenders present their report on Greece - the country where the debt crisis started - in early October, because it will make a grim reading and could upset markets, boosting Spanish and Italian borrowing costs.

The eurozone has already set aside €100bn euros to help Spain recapitalise its banks, but the country may need more aid beyond that because of large debts of its autonomous regions, which now want central government help.

Proposals for a eurozone banking union are also on the agenda as giving the ECB the powers of a single eurozone bank supervisor would pave the way for the eurozone's permanent bailout fund ESM to directly recapitalise Spain's banks, lifting some of the debt burden off Spain's shoulders.

The ESM, the creation of which was cleared by Germany's constitutional court on Wednesday, could also help Ireland.

The ministers will discuss Ireland's long-standing plea to ease the burden on its public finances of some €31bn in promissory notes issued to save two banks from bankruptcy.

Interest payments on the notes are weighing heavily on the budget of Ireland, which is otherwise a eurozone showcase of a country sticking to agreed reforms and recovering.

Most countries want the ESM to lend to distressed sovereigns without charging a penalty margin, as the temporary fund EFSF does now. But a small hard line group of northern European states believes some margin is necessary to avoid moral hazard.

The ministers will also discuss the European Commission's proposal for a banking union under which the ECB would have supervisory powers, with discussions focused on the scope of the ECB's responsibilities.